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Primaris Spin-Off, Exit Retail, Exit
Office, Significant 12,700 Residential Unit Development
Pipeline
TORONTO, Oct. 27, 2021 /CNW/ - H&R REIT ("H&R" or
the "REIT") announces today its strategic repositioning plan to
transform from a diversified REIT, into a simplified,
growth-oriented REIT with increased multi-residential and
industrial exposure surfacing value through its significant
development pipeline. This follows H&R's previously announced
sale of the Bow office tower and Bell office campus totalling
$1.47 billion in gross proceeds.
To achieve this transformation, H&R will execute the
following strategic repositioning initiatives:
(i) Tax-free spin-off (the "Spin-Off") of its Primaris
properties including all of H&R's enclosed malls to a new
stand-alone, publicly traded REIT ("Primaris") focused on owning
and managing enclosed shopping centres in Canada.
(ii) Disposition of the following property groups (the
"Strategic Dispositions"), synchronized to match capital funding
requirements. The Strategic Dispositions are poised to generate
gross proceeds of approximately $3.4
billion over time:
- Exit retail - sale of approximately $600
million of grocery-anchored and essential service retail and
monetization of H&R's CDN $470
million equity interest in Echo Realty LP ("ECHO"); and
- Exit office - sale of approximately $2.3
billion of office properties with the remaining $1.4 billion to be held for redevelopment into
Class A multi-residential and industrial redevelopments.
(iii) Reinvestment of proceeds generated from the Strategic
Dispositions to fund H&R's significant multi-residential and
industrial development pipeline and for select acquisitions, in
prime locations in Toronto,
Montreal, Vancouver, and high-growth U.S. sunbelt and
gateway cities.
"We are incredibly excited to announce our transformational
strategic repositioning plan, providing a clear path forward to
simplify H&R's business model and to create significant value
and growth for unitholders," said Thomas
Hofstedter, President & CEO of H&R REIT. "Our focus
on Class A multi-residential and industrial properties surfaces
value embedded in our existing portfolio through intensification
and redevelopment and creates what we believe is a more compelling
investment profile, streamlines our operating platform and enhances
our financial flexibility."
"Over the past several years, H&R's Board of Trustees and
management have executed on a number of initiatives aimed at
repositioning the business to maximize unitholder value and better
align with investor preferences", said Ronald Rutman, Chairman of the Board of H&R
REIT. "The Spin-Off, combined with H&R's previously completed
dispositions of the Bow office tower and Bell office campus mark
recent significant milestones in the advancement of these
initiatives. H&R will remain focused on executing the strategic
repositioning plan with the objective of unlocking the value of its
portfolio for unitholders."
STRATEGIC REPOSITIONING BENEFITS:
- Greater exposure to higher growth multi-residential and
industrial assets, with reduced exposure to retail and office
properties.
- Enhanced major market presence in the Greater Toronto Area and high-growth U.S.
sunbelt and gateway cities and immediate reduction of Alberta exposure to 7% of investment
properties post Spin-Off.
- Improved proforma balance sheet enhances financial
flexibility to execute on growth while maintaining H&R's
current investment grade credit rating.
- Upon completion of the Spin-Off, the combined annual
distributions of H&R REIT and Primaris are anticipated to total
$0.72, up 4.3% from the current
$0.69 per H&R unit. H&R is
anticipated to distribute $0.52 per
annum while Primaris is anticipated to distribute $0.20 per annum.
Key Metrics
|
June 30,
2021
|
Post Spin-Off
January 1, 2022
|
Impact
|
Reduce Calgary Office
Exposure
|
$1.1 billion
|
$372.5
million
|
√
|
Reduce Retail
Exposure
|
$4.0 billion
|
$1.8 billion
|
√
|
Improve Balance Sheet –
Debt/EBITDA(2)
|
10.0x
|
9.5x
|
√
|
Enhance Growth Profile
– Same-Asset Property Operating
Income (Cash Basis)(2)
|
0.4%(1)
|
3.0%
|
√
|
Conservative Payout
Ratio as a % of FFO(2)
|
44.9%
|
40-50%
|
√
|
Reduce Leverage – Debt
to Total Assets(2)
|
50.0%
|
46.8%
|
√
|
Improve borrower
profile – Unencumbered/ Unsecured)(2)(3)
|
1.7x
|
2.0x
|
√
|
|
|
(1)
|
Six-year 2014-2020,
Same Asset property operating income (cash basis)
average.
|
(2)
|
These are non-IFRS
ratios, comprised of non-IFRS measures. See "non-IFRS Measures"
below.
|
(3)
|
Excludes
ECHO.
|
H&R REIT STRATEGIC REPOSITIONING PLAN
- EXIT RETAIL THROUGH SPIN-OFF AND DISPOSITIONS:
-
- Primaris Spin-Off Transaction:
H&R intends to spin-off its enclosed mall portfolio and
together with Healthcare of Ontario Pension Plan ("HOOPP") create
Primaris. Primaris will own interests in 35 properties with an
appraised value of approximately $3.2
billion encompassing 11.4 million square feet of gross
leasable area ("GLA"). H&R will contribute 27 properties with
an appraised value of approximately $2.4
billion and HOOPP will contribute eight properties with an
appraised value of approximately $0.8
billion. H&R's secured debt will be reduced by
approximately $579 million for the
outstanding mortgage balances on the Primaris properties. H&R
has applied to the TSX for the listing of Primaris units on the TSX
with the ticker PMZ.UN, following the expected closing in late
December 2021 or early 2022. The
listing will be subject to the TSX's customary listing approval
requirements.
- Disposition of High-Quality Grocery-Anchored and Essential
Service Retail Properties to Fund Developments:
-
- Retail Property Dispositions:
In aggregate, H&R's grocery-anchored and essential
service retail portfolio includes 56 properties located primarily
in Ontario, encompassing 2.8
million square feet of GLA which represent a fair value of
approximately $600 million at
June 30, 2021.
H&R's 33.6% ownership interest in ECHO Realty LP, a privately
held real estate company with a portfolio of 237 grocery-anchored
shopping centres primarily occupied by Giant Eagle, Inc., one of
the largest supermarket chains in the
United States. The portfolio encompasses 2.9 million square
feet of GLA, and an equity ownership interest of approximately
$470 million at June 30, 2021.
- EXIT OFFICE THROUGH DISPOSITIONS AND RE-DEVELOPMENT:
-
- Office Properties to be Sold to Fund Developments:
The office assets to be sold over time comprise 15
properties, encompassing 4.2 million square feet of GLA with a
weighted average lease term of 9.5 years. These properties with an
average occupancy rate of 99.5% are located in major urban markets
with high-credit quality tenants, and represent a fair value of
approximately $2.3 billion at Q2
2021.
- Office Properties held for Re-development into Class A
Multi-Residential and Industrial Re-development:
12 office properties representing a fair value of
approximately $1.4 billion at Q2
2021, encompassing 3.1 million square feet of GLA with
intensification potential will be retained for redevelopment into
multi-residential and industrial properties.
- FOCUS ON MULTI-RESIDENTIAL AND INDUSTRIAL
H&R expects to evaluate each potential development in
the context of its capital allocation strategy, and may elect to
pursue development on its own, with capital partners, or sell the
developments with approvals in place, capturing much of the value
creation.
-
- Reinvest Proceeds into Higher Growth Multi-Residential and
Industrial:
-
- Proceeds generated from the Strategic Dispositions will be
redeployed into development of Class A multi-residential and
industrial properties, in prime locations in Canada, and high growth sunbelt and gateway
cities in the United States. The
total pipeline is comprised of approximately 12,700 residential
units and 3.2 million square feet of industrial GLA. The execution
of these developments within H&R's multi-residential and
industrial development pipeline is poised to drive earnings and NAV
growth.
Planned
Construction
Starts
|
Development
Projects
|
Residential
Units
|
Industrial GLA
(1000s of SF)
|
Total
Development
Budget
|
2022
|
8
|
2,150
|
580
|
$1.1 billion
|
2023
|
8
|
1,450
|
440
|
$800
million
|
2024 +
|
11
|
9,100(1)
|
2,200
|
TBD
|
TOTAL
|
27
|
12,700(1)
|
3,220
|
|
|
|
(1)
|
Latest estimated number
of units.
|
|
|
- Office to Class A Multi-Residential and Industrial
Redevelopment:
-
- 12 office properties located in Toronto, Vancouver and Montreal will be redeveloped into Class A
multi-residential and industrial properties. These office
properties would add approximately 5,900 residential units and
440,000 square feet of industrial GLA to H&R's portfolio over
time.
Executive Leadership Appointments
As part of this transformative initiative, H&R is pleased to
announce the following executive officer appointments:
Philippe Lapointe – President
Lantower Residential
Emily Watson - Chief Operating
Officer of Lantower Residential
Colleen Grahn - President of
Lantower Property Management
Robyn Kestenberg – Executive VP
Office and Industrial
Matthew Kingston – Executive VP
Development and Construction
In addition, upon completion of the Spin-Off, Alex Avery, who will be Chief Executive Officer
and a Trustee of Primaris, will be resigning as an officer and
Trustee of H&R REIT so that H&R and Primaris will be
completely independent with no common officers or trustees.
PRIMARIS
Built for the New Retail Landscape
Primaris will have substantial scale, a differentiated financial
model and a full service, vertically integrated management
platform. The portfolio will include a combination of assets
contributed by H&R and HOOPP, aggregating interests in
35 properties with an appraised value of approximately
$3.2 billion spanning
11.4 million square feet of GLA, at Primaris' interest.
Primaris will be fully internally managed, with an independent
board of trustees and operate as a distinct and separate
publicly-traded entity upon completion of the Spin-Off. Immediately
following the Spin-Off, H&R unitholders will directly own
approximately 74% of Primaris units outstanding, and HOOPP will own
approximately 26% of Primaris units outstanding.
"Primaris will be exceptionally well positioned to take
advantage of market opportunities at a unique time in the evolution
of the Canadian retail property landscape," said Alex Avery, who will be Chief Executive Officer
of Primaris following the Spin-Off. "The scale and strength of the
Primaris platform combined with its conservative financial model
provides significant flexibility and capacity to both self-fund
Primaris' strategy and positions it well to pursue investment
opportunities in the current environment."
"HOOPP is excited to be Primaris' institutional partner to this
important transaction, forming Canada's only publicly-traded, pure
play national enclosed shopping centre REIT," said Eric Plesman, Head of Global Real Estate at
HOOPP. "Primaris is a well-recognized Canadian operator with a
significant track record, and is well-positioned to grow and
benefit from the economic recovery."
Key Transaction Highlights
- Large-Scale Canadian Enclosed Shopping Centre
Portfolio: Primaris' high-quality national portfolio
will be comprised of dominant shopping centres located in primary
and secondary Canadian markets. As one of the four largest enclosed
shopping centre platforms in Canada, Primaris will be an essential partner
for retailers, providing efficient access to key markets across the
country.
- Fully-Internal Management Platform and Strong Independent
Board of Trustees: Primaris' fully-internal management platform
capabilities span leasing, legal, finance, lease administration,
human resources, information technology, accounting and reporting,
operations, asset management and development with nearly 20 years
of operating history. Primaris' executive leadership team will be
led by Alex Avery, current Executive
Vice President, Asset Management & Strategic Initiatives at
H&R REIT, and Patrick Sullivan,
current Chief Operating Officer of H&R's Primaris division,
bringing significant real estate investment, capital markets and
retail property operating expertise. The incoming Board of Trustees
has been selected to ensure strong and independent governance.
- Differentiated Capital Structure and Financial Strategy:
Primaris' leverage at formation is expected to be approximately 29%
Debt to Gross Book Value and 5.3x Debt to EBITDA. Its target payout
ratio of 45% – 50% of FFO is expected to initially provide
significant retained annual cash flow of approximately $65 million to fund investments in development
and acquisition opportunities and minimize reliance on external
capital sources. This unique and flexible financial model is
expected to differentiate Primaris, with leverage significantly
below most Canadian REIT peers.
- Strong Institutional Endorsement: HOOPP, one of the
largest and most successful pension fund investors in Canada, will be Primaris' largest unitholder,
holding approximately 26% of outstanding units following the HOOPP
Contribution, providing strong institutional support of Primaris'
governance and strategy.
- Excess Density and Substantial Intensification
Potential: The Primaris portfolio includes several urban
properties with significant intensification potential. Dufferin Grove, Primaris' flagship 1,285 suite
multi-residential development on four acres of excess land at
Dufferin Mall is well advanced, with full zoning approval expected
in 2021. Other significant intensification opportunities include
Orchard Park in Kelowna, Place
D'Orleans in Ottawa, Sunridge and Marlborough Malls in
Calgary, among others. Internal
development, intensification and adaptive reuse projects will be
considered over time, in the context of alternative investment
opportunities.
The property values and the resulting equity ownership in
Primaris are based on recently completed independent third-party
appraisals completed on 100% of the properties. H&R will
contribute 27 properties with an appraised value of approximately
$2.4 billion aggregating 7.6 million
square feet of GLA at Primaris' proportionate interest, and HOOPP
will contribute eight properties with an appraised value of
approximately $0.8 billion,
aggregating 3.8 million square feet of GLA.
Primaris will have a strong and well-diversified tenant base
with its top ten tenants representing 29% of minimum rent. Canadian
Tire, Walmart, Loblaws, TJX Companies and Bell Canada will be Primaris' largest tenants,
and seven of the top ten tenants will be investment grade rated.
Across Primaris' approximately 2,300 tenant portfolio, the weighted
average lease term will be approximately 5.1 years.
Further information regarding the Spin-Off, including
anticipated portfolio metrics and certain forecast financials will
be included in the management proxy circular (the "Circular")
expected to be mailed to H&R unitholders in November 2021. A Primaris investor presentation
containing further information regarding the Spin-Off is available
on H&R's website.
Details of the Spin-Off
H&R's properties will be transferred to Primaris pursuant to
a plan of arrangement (the "Arrangement"). Each existing
H&R unitholder will receive one unit of Primaris for every one
H&R unit held, subject to any consolidation or split of
Primaris units pursuant to the Arrangement. After completion of the
Arrangement, HOOPP's properties will be sold to Primaris in
consideration for units of Primaris. Following closing of the
Arrangement and the HOOPP Contribution, H&R unitholders and
HOOPP are expected to own an approximate 74% and 26% interest in
Primaris, respectively.
In connection with the Arrangement, H&R will apply to the
Court of Queen's Bench of Alberta
for an interim order confirming, among other things, the calling
and holding of a meeting (the "Meeting") of H&R unitholders to
be held in December 2021 to approve
the Arrangement. In addition, H&R has (i) applied to the Canada
Revenue Agency for an advance income tax ruling confirming certain
Canadian federal income tax consequences of the Arrangement (the
"CRA Ruling"), and (ii) applied for conditional approval from the
TSX for the listing and posting for trading of the Primaris units.
Listing will be subject to the TSX's customary listing approval
requirements.
The Arrangement is subject to the approval of H&R
unitholders by way of the affirmative vote of at least two-thirds
of the votes cast by H&R unitholders present in person or by
proxy at the Meeting. The Board of H&R has determined that the
Arrangement is in the best interests of H&R REIT and
accordingly, H&R's Board recommends that H&R unitholders
vote IN FAVOUR OF the Arrangement for the reasons to be set out in
detail in the Circular. The H&R trustees have received a
fairness opinion from their financial advisor, CIBC World Markets
("CIBC") that, subject to the assumptions, limitations and
qualifications contained therein, (i) the distribution to H&R
unitholders pursuant to the Arrangement is fair, from a financial
point of view, to the H&R unitholders, and (ii) that the
consideration to be paid to HOOPP by Primaris is fair, from a
financial point of view, to Primaris.
If the Arrangement is approved by the H&R unitholders and
assuming timely satisfaction (or waiver) of all other closing
conditions, including receipt of a final order of the Court of
Queen's Bench of Alberta and the
CRA Ruling, it is anticipated that the transaction will be
completed in late December 2021 or
early 2022.
The foregoing is qualified in its entirety by the more
detailed information that will be included in the Circular.
Unitholders are urged to carefully read the Circular, once
available, before making their decision with regards to the
Arrangement. Copies of the arrangement agreement,
purchase and sale agreement relating to the properties to be
contributed by HOOPP and Circular will be available on SEDAR at
www.sedar.com.
ADVISORS
CIBC World Markets and Scotiabank are acting as financial
advisors to H&R REIT. Blake, Cassels & Graydon LLP is
acting as a legal counsel to H&R REIT.
BMO Capital Markets is acting as financial advisor to HOOPP.
Torys LLP is acting as a legal counsel to HOOPP.
Real Asset Strategies is acting as investor relations advisor to
H&R REIT.
CONFERENCE CALL
A conference call and live audio webcast and accompanying
presentation hosted by H&R REIT and Primaris will be held to
discuss the strategic repositioning plan, including the Spin-Off of
Primaris on Wednesday, October 27,
2021 at 11.00 a.m. Eastern
Time. Participants can join by logging into the webcast
here, or at www.hr-reit.com, and selecting Investor Events under
the Investor Relations section, or by dialing 1-888-510-2507 or
1-289-514-5065. Please connect at least 15 minutes prior to the
conference call to ensure adequate time for any software download
that may be required to join the webcast. The webcast will be
archived on H&R's website following the call date.
For those unable to participate in the conference call at the
scheduled time, it will be archived for replay beginning
approximately one hour following completion of the call. To access
the archived conference call by telephone, dial 1-800-770-2030 or
1-647-362-9199 and enter the passcode 7614157 followed by the pound
key. The telephone replay will be available until November 3, 2021 at midnight.
Investor presentations for both H&R and Primaris are
available on H&R's website at
https://www.hr-reit.com/investor-relations/#investorpresentation.
Q3 RESULTS UPDATED CONFERENCE CALL AND WEBCAST DATE
H&R now intends to release its financial results for Q3 2021
on Monday, November 15, 2021.
Management will host a conference call to discuss such financial
results on Tuesday, November 16, 2021
at 9.30 a.m. Eastern Time.
Participants can join the call by dialing 1-888-510-2507 or
1-289-514-5065. For those unable to participate in the conference
call at the scheduled time, it will be archived for replay
beginning approximately one hour following completion of the call.
To access the archived conference call by telephone, dial
1-647-362-9199 or 1-800-770-2030 and enter the passcode 3504623
followed by the pound key. The telephone replay will be
available until Tuesday, November 23,
2021 at midnight.
A live audio webcast will be available through
https://www.hr-reit.com/investor-relations/#investor-events. Please
connect at least 15 minutes prior to the conference call to ensure
adequate time for any software download that may be required to
join the webcast. The webcast will be archived on H&R's website
following the call date.
About H&R REIT
H&R REIT is one of Canada's largest real estate investment
trusts with total assets of approximately $13.1 billion at June 30,
2021. H&R REIT has ownership interests in a North
American portfolio of high-quality office, retail, industrial and
residential properties comprising over 40 million square feet.
About the Healthcare of Ontario Pension Plan
HOOPP serves Ontario's hospital and community-based healthcare
sector, with more than 610 participating employers and 400,000
active, deferred and retired members. It operates as a private
independent trust and is governed by a Board of Trustees with a
sole fiduciary duty to deliver the pension promise.
HOOPP is fully funded and manages a highly diversified portfolio
of more than $104 billion in assets.
The 10-year annualized rate of return is 11.16%. HOOPP's investing
success is delivered by an in-house team of investment
professionals.
HOOPP's real estate portfolio has a market value of more than
$15 billion, spanning multiple
geographies and asset classes (office, logistics, retail,
residential). The Fund continues to grow both the scale and scope
of this portfolio, with a focus on high-quality assets and
best-in-class partners that share our sustainable investing
approach and creation of long-term value for our members. The real
estate portfolio had a currency-hedged return of 8.2% over the past
five years, which is $1.8 billion
over the benchmark.
Non-IFRS Financial Measures
Growth in Same-Asset property operating income (cash basis) and
Payout ratio as a % of FFO are both non-GAAP ratios that are more
fully defined and discussed in H&R's MD&A in full as at
June 30, 2021 and available on
www.hr-reit.com and www.sedar.com. Debt to EBITDA is a non-GAAP
ratio is calculated by dividing the total of: Debt (including
mortgages payable, debentures payable, unsecured term loans and
lines of credit) by (i) property operating income (excluding
straight-lining of contractual rent and IFRIC 21); (ii) finance
income; and (iii) trust expenses (excluding the fair value
adjustment to unit-based compensation). Management uses Debt to
EBITDA to assess the REIT's leverage ratio.
These ratios do not have a standard meaning prescribed by GAAP
and therefore they may not be comparable to similarly titled
measurers presented by other publicly traded companies, and should
not be construed as an alternative to other financial measures
determined in accordance with GAAP.
Forward-looking Information
Certain statements in this news release contain forward-looking
statements within the meaning of applicable securities laws (also
known as forward-looking statements). These forward-looking
statements include, but are not limited to H&R's plans,
objectives, expectations and intentions, including the Spin-Off,
the Strategic Dispositions, the timing thereof and the gross
proceeds therefrom, the intention to develop and redevelop
properties, management's beliefs regarding H&R's growth
prospects and the ability to surface value for unitholders, the
benefits of the strategic repositioning initiatives and the pro
forma impact on H&R's portfolio and financial metrics,
H&R's investment grade credit rating, combined annual
distributions of H&R REIT and Primaris, H&R's target
investment mix, the transaction with HOOPP, earnings and NAV growth
as a result of execution of H&R's development pipeline, the
timing and budgets for future developments, the size, asset value
and portfolio metrics of Primaris upon completion of the Spin-Off
and HOOPP Contribution, Primaris' ability to take advantage of
market opportunities, Primaris' expected leverage, payout ratio,
and annual retained cash flow, Primaris' growth potential,
intensification opportunities, Primaris' capital structure and
financing strategy, the timing of H&R's unitholders meeting and
publication of related unitholder materials, the expected
completion date of the proposed transaction, the ability to obtain
the final order and the CRA Ruling on the terms and timing
contemplated by the parties, to complete the Arrangement and the
transaction with HOOPP on the terms and on the timing contemplated
by management, the assumption that all necessary conditions will be
met for the completion of the Arrangement and the pro forma
information regarding Primaris. Such forward-looking statements
reflect H&R's current beliefs and are based on information
currently available to management. These statements are not
guarantees of future performance and are based on H&R's
estimates and assumptions that are subject to risks and
uncertainties, including those to be set forth in the Circular and
in H&R REIT's materials filed with the Canadian securities
regulatory authorities from time to time, which could cause the
actual results and performance of H&R to differ materially from
the forward-looking statements contained in this news release.
Although the forward-looking statements contained in this news
release are based upon what H&R believe are reasonable
assumptions, there can be no assurance that actual results will be
consistent with these forward-looking statements. There can be no
assurance that the proposed transaction will occur or that the
anticipated benefits will be realized. The proposed transaction is
subject to approval by the Court of Queen's Bench of Alberta, H&R unitholders and by the TSX
and the fulfillment of certain conditions, and there can be no
assurance that any such approvals will be obtained and/or any such
conditions will be met. The proposed transaction could be modified,
restructured or terminated. All forward-looking statements in this
news release are qualified by these cautionary statements. These
forward-looking statements are made as of today and H&R, except
as required by applicable law, assume no obligation to update or
revise them to reflect new information or the occurrence of future
events or circumstances.
Additional information regarding H&R REIT is available at
http://www.hr-reit.com and on www.sedar.com.
SOURCE H&R Real Estate Investment Trust